What should I do with this home? Former primary residence

Question

This was my former primary residence. It's currently being rented out until the spring. My first thought is to sell it and move on to something better. I wanted see if there is another option I'm not thinking of (refinancing into something to have lower mortgage debt, creating more cashflow)?

The house is in good condition, no major repairs coming anytime soon. It's in an up and coming area of Milwaukee as well. On the border of Tosa, which is a hot area. Another benefit is that it's brick, so no siding replacement required. The bad, it's on a slab and who knows how old the plumbing is and electrical. Numbers below:

Purchase Price

$121,000

Rent

$1,095

Vacancy

$91.25

Mortgage Payment

$368.87

Taxes

$248.20

Insurance

$97.00

Maintenance

$50

Future Cap-Ex?

$150

PM

$110

Lease Fee

$41.67

Total Monthly Expenses

$1,156

Projected Cash Flow

-$61.49

Paid Off

$568.75

I think I can get rent up to $1,200/m perhaps

As you can see with the current mortgage, I'm negative long term with the Cap Ex budget being applied. Is my only way out selling? Or can I refi something, reduce debt for cash flow.

William S. · Answer

2 bed 1 bath. No value add opportunity here. Selling.

William S. · Answer

Account Closed

The area will not get worse by any means. It's a solid area, but by no means high appreciation. It'll just keep up with inflation that's it.

Interest rate is 3.74% with 20% down. Only equity is the 20% down and maybe an extra $5k. Can I still tap into the equity/down payment to fund my rehab?

Account Closed · Answer

@William S. Oooooo, I'd be tempted to keep it! Especially with your moves to reduce your expenses and bump up cash flow a bit. You describe the area as being a good bet for future growth and for appreciation. You know the area well. The pictures you have posted have the look of a solid rental property. You probably have a good interest rate on your existing mortgage (as it was your primary residence) and you have probably already built up some equity. Tap the equity through a home equity loan or line of credit and use that to finance your next purchase. Keep this little cutie that you already know and love.

William S. · Answer

@Dave Lawrence

Insurance is actually $72/m, but I still am seeking around $50/m from another provider.

The biggest issue with keeping it is that it's on a slab. Plumbing is original, so if I keep it long term, I'd want to update that. Who knows how much that would cost........

Dave Lawrence · Answer

Granted those pics aren't super-high res, but the place looks cute as a button. You mention cabinets needing replaced. But I also see stainless appliances, stacked w/d, subway tile backsplash... Why not just do a decent, cost-effective refresh of the cabinets and call it good? What are your reno plans with that $15K/

You're also pretty tough on yourself numbers-wise: I see you've included the $500 lease fee in your costs, and assumed an 8.3% annual vacancy rate. Will it turn over that frequently? And $1164/yr for insurance? What are your deductibles? That seems quite steep... Finally, you're factoring in almost 20% monthly for maint and CAPEX.

No one will ever accuse you of being delusional about your properties :) The trend in this thread has been for you to dump it, but just thought I'd throw these observations out there... I've never been to that area, but if, as you say, you're in the path of progress already, why not see how it goes?

Clayton Mobley · Answer

@William S. once again we cross-post lol

If you have a plan to pay for the rehab expense-free, then all the better. Sounds like you know what you need to do. Sorry I couldn't offer a more profitable plan of attack. Hopefully if you end up selling next year when the weather thaws you'll have had tenants paying your mortgage and maybe a little appreciation to reward you for your patience.

One thing to keep your costs low, which I'm guessing you already have thought of, is to make sure you keep up on the maintenance. Don't defer things, as they just fester and become bigger, costlier problems down the road. We try to get any maintenance calls taken care of in 24 hours, which keeps good tenants happy and our long-term maintenance costs down. Since you're going to be the landlord instead of hiring a PM, just something to consider.

Good luck!

Clayton Mobley · Answer

@William S. Ok that makes things clearer. So you really don't have any appreciation gain to speak of and very little of the loan paid down aside from your downpayment....

It sounds like with your limited options and seasonal restrictions you may have to, as you said 'make the best out of it'. The upside is that it likely won't lose value over time, so if you will need to do the kitchen remodel regardless at least you can boost the resale value for next year. The rent rate (at $1200) is good for the price you paid, it's just a shame that you need to pour more into the prop to get there, although those improvements will increase your tax basis which will be useful if/when you sell. If it's just cabinets and other cosmetic things, maybe you can get it done for less than $15k, fingers crossed.

Another thing to keep in mind is that if you rent it out for a 12-18 months, 'officially' converting it into a rental, you could use the 1031 to leapfrog tax-free (deferred, not completely avoided) into other investment props. If you sell within the next three years, you can still qualify for the Sec 121 capital gain exemption (up to $250k if you're single, $500k if married). So there is a sweet spot where you can take advantage of both (basically after one year but before three). Just to point out that you will have additional strategic options down the road if you do end up renting it for a while.

At this point, it sounds like you will need to just massage your numbers to get to positive flow, let tenants pay down the loan for a while and then try again next year if you feel like selling is the better option. It's kind of a tough spot to be in, but there are many people in much worse situations with their accidental rentals - at least you have a way to force positive flow, even if it isn't necessarily ideal.

William S. · Answer

@Clayton Mobley

• Yes. It is not an ideal situation. At this point I'm focusing on how to improve the situation as a rental.
• I do have another rental that is performing well. Originally bought as a rental is why. High cash flow and $25-$30k in equity, but I am not interested in doing a cashout refi. Saving that for a later date when major repairs are needed
• So my current portfolio looks like this

Houshack duplex. Pays for the PITI of a 3.5% down FHA loan in a A-class area1 SFH rental that performs well1 SFH converted rental that isn't the greatest
• Houshack duplex. Pays for the PITI of a 3.5% down FHA loan in a A-class area
• 1 SFH rental that performs well
• 1 SFH converted rental that isn't the greatest
• I can fund the $15k rehab with a 0% interest Credit Card that I can payoff easily before the 15 month term

• Houshack duplex. Pays for the PITI of a 3.5% down FHA loan in a A-class area
• 1 SFH rental that performs well
• 1 SFH converted rental that isn't the greatest

William S. · Answer

@Clayton Mobley

• We had a list price offer for $127,500. I bought it for $121,000 two years ago
• Buyer got cold feet. Strange to work with
• Owe roughly $90k on the loan
• Needs to rent in August because of the weather up here. Everything is very seasonal based
• Can only find buyers and renters from May 1st - Sept 1st
• Kitchen remodel would have to get done. Cabinets are original and falling apart
• If it does not sell this year, it'll be hard to ever sell. Selling time frame is short
• Was never intended to be a rental, but may be forced into making the best out of it

Clayton Mobley · Answer

@William S. sorry looks like you guys were posting while I was writing lol

At your interest rate and minimal equity, you don't have a lot of options finance-wise unless it has appreciated a lot while you've owned it. To pull money out via HELOC you can only borrow a max of 80% of the home value (for primary residences, but since you're converting to a rental, likely just 70-75%), less what you owe. At this point, you still owe almost 80% unless the value has changed considerably, so you'd have very little, if anything, to draw on. Your options are similarly limited in terms of refinancing because you haven't really paid down your first loan yet and you already have a very low rate. Since you're converting into a rental, your refi rate will very likely be higher since the bank sees investments properties as higher risk than primaries.

If you have a lender you really trust you could talk with them about options but I wouldn't hinge your plan on anything miraculous happening on the bank's end.

Purchase Price	$121,000
Rent	$1,095


Vacancy	$91.25
Mortgage Payment	$368.87
Taxes	$248.20
Insurance	$97.00
Maintenance	$50
Future Cap-Ex?	$150
PM	$110
Lease Fee	$41.67
Total Monthly Expenses	$1,156
Projected Cash Flow	-$61.49

Paid Off	$568.75

What should I do with this home? Former primary residence

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